Benefits of Owning Multiple IRAs or HSAs

Multiple IRAs or HSAs: What are the Benefits?

Patricia McCrystal

September 18, 2015

Individual Retirement Accounts (IRAs) and Health Savings Accounts (HSAs) are powerful tools investors can use to save and invest for retirement or qualified medical expenses, all on a tax-deferred basis. Many investors only open one IRA or one HSA account, not realizing they can open as many HSA and IRA accounts as they desire – and the potential benefits of doing so are nothing to overlook.

You can further the autonomy of your retirement account by opening a self-directed IRA or HSA. Self-directed accounts allow you to invest in nearly any asset you desire (with the exception of life insurance and collectibles). Self-directed IRAs or HSAs expand your investment horizons outside of the stock market and into any asset market in which you may already have knowledge and experience.

All HSAs and IRA account types have a yearly contribution limit that encompasses every IRA or HSA account you own; meaning your contribution limit remains the same regardless of how many accounts you open. However, there are strategic benefits to opening multiple retirement and HSA accounts. Multiple accounts allow you to maximize investment opportunities and diversify your retirement portfolio. Investing in more than one asset class provides autonomy from the potential volatility of any single asset market.

If it helps you to calculate potential returns for each asset, you may want to keep your assets in separate IRA accounts. Some investors prefer to open an IRA or HSA for every asset market in which they want to invest. Multiple IRA accounts can help you keep your assets organized in a way that makes sense to you. Additionally, if one or more of your IRA assets has more liability risk associated with it, your attorney may advise you to keep that asset in a separate IRA.

It’s logical to assume that multiple accounts would mean paying more in fees.  However, the reality is that each new account with New Direction only means a $50, one time fee to set up the new IRA.  In almost every case, the total fees thereafter are the same, whether you have one account or ten.

For instance, if you have an old 401(k) invested in publicly traded securities, you can keep some of the 401(k)  funds with its current provider, and open a self-directed IRA with New Direction to diversify and invest in alternative assets like real estate, private equity, or both – the combinations are limitless.

For HSAs, a tactic some investors may prefer is owning a “liquid” HSA with the amount of money he or she feels comfortable with, in the event of a medical emergency. With the money over and above the “liquid” contingency, investors can open one or more self-directed HSA accounts to invest in specific asset markets for long-term returns on a tax-deferred basis; thereby creating money for a lifetime’s medical expenses. Investors may have an HSA invested in stocks and bonds, and other accounts invested in precious metals or private lending; among many other asset options.

To learn more about opening self-directed IRA and HSA accounts, feel free to call New Direction or visit us online at www.ndira.com. 

New 5498 Reporting: What does it mean for my IRA’s private loans?

Patricia McCrystal

August 25 2015

IRA holders are facing a new change in asset reporting for the 2015 tax year. IRS form 5498, which IRA providers use to report the value of your account, includes new Boxes 15a and 15b, which require IRA administrators to categorize the values of the assets within their clients’ IRA accounts. This includes a category that delineates the value of private loans extended with IRA account funds (15b).

Prior to the 2014 tax year, Box 15 didn’t exist, and IRA account holders only had to report the overall value of their IRA or qualified retirement plan. Box 15 appeared on IRS form 5498 in 2014, but reporting within the box was optional. For the 2015 tax year, the IRS is actively taking steps to enforce requirements for hard-to-value IRA assets. This means the IRS will have a more differentiated system for identifying which IRA accounts possess hard-to-value assets; not to mention a heightened ability to target certain investment structures in which prohibited transactions can often occur, such as Checkbook Control IRAs/ Individual LLCs.

Code B of Box 15b. requires the reporting of “Short or long-term debt obligation that is not traded on an established securities market”. This is essentially asking for a valuation of all notes and private loans within your IRA. Every asset in your IRA has a generally accepted process for valuation; original, purchased, and secondary market notes included.. The value of a private loan is determined by more than just the amount of money lent – there are three factors which contribute to the valuing a private loan in an IRA: 1. Original loan amount, 2. Interest rate, and 3. Length of term.

Theoretically, the value of a note fluctuates everyday due to inflation and the risk associated with the loan’s repayment. A private loan’s value is also dependent on the lender’s risk tolerance, as defined within the loan’s agreed-upon interest rate and maturity date.

The creation of Box 15 may mean the chances of your IRA getting audited by the IRS could increase. IRA account holders will have to be more meticulous than ever in their IRA transaction proceedings. So what can you do to make sure you and your IRA account are ready for IRS scrutiny should they choose to audit your account?

It requires a joint effort between the IRA account holder and the IRA administrator to keep account proceedings within the bounds of IRS rules and regulations. IRA administrators that provide educational services to their clients make it easier for account holders to exercise due diligence when making investment decisions. Choose a credible IRA administrator with a reliable track record and an educational business model to confidently make knowledgeable decisions about your IRA account proceedings. To learn more about self-directed IRAs, feel free to visit New Direction IRA’s website at www.ndira.com for educational videos, webinars, and more.

Gold and Silver with an IRA Custodian vs. IRA LLC Home Storage

What’s the Real Difference?

Patricia McCrystal
Louisville, CO, August 10th 2015 – Here at New Direction IRA, we make it a priority to empower our clients with unbiased information about their investment choices so they can make knowledgeable investment decisions. If you have a self-directed IRA account with New Direction IRA, you’re more than likely already aware of your ability to invest in gold, silver, and other precious metals with your IRA funds. However, as more companies promote the idea of storing gold and silver at home with an IRA LLC (or in a local safe deposit box), we’d like to highlight the differences between storing precious metals at a depository via an IRA provider, and storing precious metals at home with an IRA LLC. 

Companies that endorse the idea of home storage don’t always paint the whole picture regarding benefits, risks, and rules of at-home storage vs. utilizing a depository that specializes in precious metals storage through the IRA administrator. These companies usually refer you to your own legal counsel for advice on the process.

You can rely on New Direction to communicate the relatively unknown details about at-home metals storage that you need to make a fully informed decision about your precious metals IRA.

IRA/LLC program:
•  The IRS is notified annually that your IRA owns the LLC.
•  Metals investment choices are severely limited.  No metals other than US minted Eagles
•  The IRA owner must supply the IRA provider with third party confirmation of the value of the LLC including any metals and any cash it owns.
•  Insurance for home stored metals is unattainable at any reasonable price.
•  Safe Deposit box storage is not insured by the bank and although insurance is available from select vendors, it is expensive. (ex: $100K  = $200/yr  $50K = $110, $20K = $75)
•  The metals still belong to the IRA, not to you, so you must avoid any prohibited transactions with them otherwise your IRA is at risk. An example of this would be pledging the metals for a personal loan or taking personal ownership of the metals directly.
•  Distributions of metals or other assets owned by the LLC must go first to the IRA provider to be reported to the IRS.
•  Providing storage space for the LLC assets at your personal residence, in your personal safe, in your personal back yard, may be a prohibited transaction.
•  The LLC must have a business bank account which may have monthly fees.
•  Bank safe deposit boxes cost between $15 to $65 per year or more.  Keep in mind that silver eagles take much more space per $.
•  IRA provider annual fees for LLCs are often higher than for direct metals ownership.
•  Bookkeeping for the LLC must be maintained by the IRA owner.
•  Annual reporting and state filing fees may be required for the LLC.
•  LLC set up and legal fees are required.
•  If the IRS asserts that a prohibited transaction occurred, the burden of proof is on the taxpayer to ensure that the IRA holder did not receive a personal benefit.  In tax court you are presumed guilty until you prove otherwise.
•  Personally-held metals are likely subject to a higher level of due diligence from buyers as there is no documentation of “chain of possession” ensuring that the metals have not been tampered with and may reduce the resale value of some metals.

IRA Direct Ownership:
•  The IRA provider does not alert the IRS that your IRA owns metals.
•  You may invest in any allowed metals.
•  You pick from a selection of depository companies specializing in holding metals.
•  You may take distribution of or sell the metals at any time.
•  You do not need to supply the IRA provider annual confirmation of the value as this is done automatically by the IRA provider.
•  Insurance is included in the depository fee for any metals stored.
•  There is practically no possibility of you having a prohibited transaction. 
•  Banking accounts and bookkeeping is included in IRA provider fees.
•  IRA providers often have lower annual IRA fees for metals than any other asset.
•  Depositories offer either specific item storage or commingled storage at your option.
•  There is no state reporting required by you.
•  No LLC creation fees or legal fee is needed.
•  IRA can be established and ready to make a purchase significantly faster.

Although the idea of having your IRA’s precious metal sitting on your kitchen table may sound appealing, most of our clients realize that holding their IRA’s metals with a professional administrator is the option with lower stress, lower hassle, and lower risks.
For many investment strategies, there are multiple factors in play when making the best choice. Education about IRS rules and regulations is critical to making knowledgeable IRA investment decisions.

For New Direction account holders, our numerous educational programs and materials provide the best information in the industry. Use this chart as a quick reference guide to compare the risks, costs, and responsibilities of direct IRA ownership verses IRA LLC home storage of your precious metals assets. For more information on New Direction's Precious Metals IRA and IRA/LLC options, please visit our gold IRA website, and as always, happy investing!

New Direction CEO Makes Waves with Lawline.com IRA Courses

Patricia McCrystal

July 10th, 2015

Bill Humphrey

If you are looking for continuing education courses that provide a clear and direct run down of investment options within a self-directed IRA, make it a priority to view Bill Humphrey and Bradley Burnett’s IRA related courses on Lawline.com. These courses run the gamut for IRA related information – from insider knowledge about current IRA investing trends, to the ins-and-outs of Unrelated Business Income Tax – Humphrey and Burnett make IRA education smooth and simple, without skimping out on any important details.

Bill Humphrey is an experienced Certified Public Accountant who has specialized in tax-related property issues and forensic accounting over the past 20 years. He is the Co-founder and CEO of New Direction IRA, leading provider of investor education and administrative services for retirement accounts and HSAs for over 13 years.

Bradley Burnett, J.D., LL.M., is a practicing tax attorney in Denver, Colorado, with 32 years of tax practice experience. His practice emphasis is on tax planning and tax controversy resolution. Bradly has been the top rated and most requested instructor for the Kansas Society of CPAs annual tax conference.

Regarding how accessible and engaging these courses are for the average viewer, the proof is in the pudding: according to Lawline.com, each course was rated above the 90th percentile by reviewers. These ratings come as little surprise, considering New Direction IRA boasts an education-based business model that empowers clients to make knowledgeable decisions about their self-directed IRA investments. What’s more is Burnett and Humphrey can customize courses for any reader’s office, in addition to offering CPA and RE professional courses. You can find the CPA courses at AMICPE.com.

The ratings for the courses in terms of viewers who said they would recommend the course to others breaks down as follows: 269 out of 286 viewers recommend "Self-Directed IRAs: The Fastest Growing Segment of Retirement Investing", 117 out of 123 viewers recommend "Case Studies: What Self-Directed IRAs are Doing Now", 173 out of 178 viewers recommend "Unrelated Business Income Tax", and 116 out of 120 viewers recommend "Checkbook Control IRA: Handle with Care".

In order to view these courses, all interested persons will need a Lawline.com subscription, or need to pay per course through Lawline.com. To take advantage of free educational resources, you and your clients can visit New Direction.com today to access specialized material and informational videos about every type of IRA and IRA investment available through your self-directed IRA.

Secured or Unsecured Promissory Notes and Private Lending

Secured or Unsecured Promissory Notes: Due Diligence and Private Investing

If you’re looking to use your self-directed IRA to invest in a private lending opportunity, it’s important to understand the difference between a secured and an unsecured promissory note before sealing the deal.

Patricia McCrystal

July 10th, 2015

Your best friend from college, a stay at home dad, has decided to pick up a new hobby that will help him generate additional income for his growing family. After he and his wife remodeled and sold their first home for a sizable profit, your friend has decided to try his hand as a novice real estate fix-and-flipper. You've talked to your friend in the past about wanting to invest your self-directed IRA account into an alternative asset - something more concrete than just stocks and bonds. Now he’s approached you to ask if you’d be willing to invest in his next real estate fix-and-flip project. He already owns the house, but he’s asking you to finance the remodeling of the property.

Before you agree to use your self-directed IRA account to loan him the money, you have to decide whether to request a secured or unsecured promissory note from your friend. A promissory note is a written, signed, and dated contract that establishes the rights and duties of the parties involved in the loan agreement. The loan recipient agrees to pay a certain amount of money either on demand, at a specified time, or in installments to the lender. The amount due may include interest on the note’s unpaid principal amount.

A secured note is any debt secured by real property. This could include a first deed of trust, a vehicle title, or a certificate of deposit. An unsecured note is any note that is uncollateralized. You trust your friend will repay the loan; you’ve known him a long time and don’t think he would take advantage of your generosity. You don’t want to undermine your relationship by requesting a secured note.

However, your friend does have some outstanding student loans from college that he still hasn’t paid off; not to mention his wife is expecting another baby before the end of the year. You’re afraid that without some form of collateral, he may run into financial trouble, and you’ll have to accept a loss on the loan.

When considering a private lending opportunity with self-directed IRA account, every investor should exercise two types of due diligence. First, is the investment viable? Meaning, what will be the estimated rate of return, and does the investment make financial sense? Will this investment produce a significant cash flow for your IRA account? Secondly, is this investment a scam? Is it being proposed by a reputable and non-fraudulent source? Although you want to expand your IRA’s investment opportunities and you want to help your friend with his fix-and-flip project, it’s important to acknowledge possible drawbacks and faulty dealings with every investment opportunity.

Before extending a private loan, every investor should “do the numbers” for the deal. Understand how to determine whether you are about to engage in a good or bad investment. How does the estimated cash flow of this investment compare with other opportunities? What is your personal risk tolerance?

With real estate, factors to evaluate may include physical inspections of the property, title company and insurance (make sure the person selling the property is the full legal owner), quality of neighbors, cost of utilities, HOA fees, property insurance, rental history & market rents (including surrounding properties), generating your own expenses (time and energy spent doing research on the property), among many other factors.

Due diligence is not a perfect formula. You may exercise extreme vigilance before evaluating an investment opportunity and still get taken advantage of – by a scam artist, or a well-meaning friend. Determining whether you want a secured or unsecured note from your loan recipient is completely up to you. However, a secured promissory note guarantees you won’t be left completely empty handed if your loan recipient gets himself into financial trouble – or if his wife has twins!

Expenses to Pay? Make Sure it Stays in Your IRA

Patricia McCrystal
June 25th 2015

If you're the type of active investor who prefers to stay engaged with the oversight of your investments, you are likely already well-versed in the wide array of investment opportunities available through a self-directed Individual Retirement Arrangement. Contrary to common belief, your IRA account has almost limitless investing potential - providing the asset and your management methodology align with IRS guidelines.

Despite your investment savvy, when it comes time to pay the piper for your IRA expenses, including custodial services for those assets, you may have a few questions about what the process looks like. Can you as the IRA account holder finance the expenses of your retirement plan with your own personal funds? What about collecting income – do you as the IRA owner get to handle any of your hard-earned capital gain?

The fact of the matter is, your IRA is a completely separate legal entity from you, the IRA account owner. Consequently, financing the expenses of your IRA account and collecting income from your IRA’s investments must all be done through your IRA, not through the account of any disqualified persons – yourself included.

Nick Snapp, Client Representative at New Direction IRA, explains that the details of this process are fairly intuitive, as long as you understand the basic tenants of an IRA, “Although an IRA may be owned by a client, it’s helpful to look at it as a sovereign entity. The reason IRA administrators like New Direction exist is because the IRS wants to keep IRA owners at an arm’s length from their IRA investments.”

“Because an IRA is its own legal entity, any money that is earned through its investments or owed for its expenses must flow through IRA funds themselves. As far as making this process as painless as possible, New Direction has a leg up on its competitors because of our Online Bill Pay.”

New Direction IRA is paving the way in technologically advanced payment processes for self-directed IRA administrators. NDIRA has created an online bill payment environment that saves clients time and money. This unique feature allows clients to submit expense payments through myDirection.com, and reduce processing time down to only one business day. There are also no additional check fees to this process.

“Another benefit of the Online Bill Pay feature is clients’ ability to view their payment throughout the entire process. The feature works kind of like a bank account. Clients also have direct access to their funds. They can request a check for emergencies and receive it between 1 and 3 business days.”

To learn more about New Direction’s quick and efficient Online Bill Pay feature, click here. 

Remember, you and your IRA account are friends, not carbon copies. Your IRA’s profits and expenses must be managed through your IRA alone – a provision that allows you to bask in the tax benefits that IRA accounts have to offer!

Think of Your IRA When Planning For Higher Education Expenses

Careful planning for future education expenses is becoming more common as the national average for college tuition costs continue to rise. Many savers are already familiar with tax-advantaged vehicles such as the 529 Plan or Coverdell Savings Account but did you know that all IRA account structures offer certain incentives for educational expenses as well? This article explores IRS Publication 970 and the exception to additional tax on early IRA distributions for qualified education expenses.

SOURCE: U.S. Department of Education, National Center for Education Statistics. (2013)

When it comes to taking IRA distributions an additional 10% penalty is imposed for withdrawing funds before the designated retirement age of 59 ½. This additional tax applies to the Traditional IRA account structure but also includes SEP IRAs, SIMPLE IRAs, and Roth IRAs. Note that early distribution penalties may be as high as 25% for SIMPLE IRAs.

If you decide to withdraw from an IRA to pay for higher education expenses for either yourself or others, you may be able to avoid the 10% penalty that would normally be imposed. Let’s take a closer look at the eligibility requirements below.

Who is eligible for the exception? 

This exception applies to: yourself as the IRA owner, your spouse, or your or your spouse’s child, foster child, adopted child, or descendant of any of them. 

What is considered an eligible education institution? 

Eligible institutions include: any college, university, vocational school, or other postsecondary school eligible to participate in a student aid program administrated by the U.S. Department of Education. 

What types of expenses are considered ‘qualified’ education expenses (QEE)?

• Tuition
• Fees
• Books
• Supplies
• Equipment required for enrollment or attendance.
• Services for special needs students in connection with their enrollment or attendance. 
• Room and board if the student is enrolled at least half-time. Half-time status is determined under the standards provided by each individual institution.
• See Publication 970 for specific details on room and board.

Be sure to review IRS Publication 970 for additional details, considerations, and examples. The information provided in this article is for educational purposes only and is not guaranteed to be reliable. Always see a qualified tax professional who can offer advice and guidance. New Direction IRA does not offer tax, legal, or investment advice.

2014 IRA Contribution and Distribution Rules

People in the accumulation phase of their working lives are often concerned about “maxing” out individual retirement account (IRA) contributions while retirees are concerned about annual required minimum distributions (RMD). Whether contributing or withdrawing, the amounts change almost annually due to inflation protections and life expectancy tables. Below is a discussion on 2014 traditional IRA rules.

2014 IRA Contribution Considerations

A traditional IRA is a fantastic retirement tool that allows tax deductions for those contributing and tax-deferred growth on investments. IRA rules also allow those investors nearing retirement age (50 years and older) to contribute more to their IRA plans than someone younger. If you are engaged in 2014 retirement planning, below are the IRA contribution limits for 2014:

• $5,500 for those below age 50
• $6,500 for those above age 50
• Anyone age 70 ½ + cannot contribute to a traditional IRA 

In order to contribute to an individual retirement plan, one must earn a taxable income. In other words, in order to contribute $5,500, for example, a person must have made at least $5,500 in taxable income.

2014 IRA Distribution Considerations

If you are a retired traditional IRA investor over age 70 ½ or you have inherited a traditional IRA, you are probably considering your 2014 required minimum distribution (RMD) amount. While investment growth of a traditional IRA is tax-deferred, withdrawals are considered ordinary income. A required minimum distribution is calculated based on the total IRA account balance and your life expectancy or the life expectancy of who you inherited it from. Please keep in mind a few other IRA withdrawal considerations outside of retirement and inheritance:

• As a broad rule, taking a distribution from a traditional IRA account before age 59 ½ will result in a 10% IRS penalty. Consult your tax expert for more specifics on penalty exclusions. 
• ROTH IRA accounts do not have required minimum distributions.
• The penalty for missing your 2014 RMD is 50% of the difference between what should have been distributed and what actually was. 
• There is no penalty for withdrawing more than your required minimum distribution. 

While it may feel like 2014 is almost over, IRA contributions can be made until April 15^th 2015. This allows anyone planning for retirement to consult with his or her tax advisor to choose the most tax-advantaged amount of contribution or withdrawal based on concrete 2014 taxable income calculations. 

I Want my IRA to Invest in “Green” Energy

Energy consumption is on the rise, both nationally and globally, and many new energy companies are popping up to fulfill the increased demand. Growth in the alternative energy industry has increased the number of wind turbines and solar panels that provide power to our homes. The oil and natural gas industry is also still booming, with technological advances in shale extraction leading to more opportunities for expansion. All this growth has caused many of our self-directed IRA holders to ask us how they can take advantage of this emerging industry as part of their retirement portfolio.

Whether the energy industry is something you have previous experience with or it is a new interest you have developed, the IRS allows SDIRA holders to pursue their interests and use their personal agenda or strategy when investing. Your IRA can invest in energy in a number of ways, including lending funds to an energy start-up through promissory notes, purchasing shares of private stock, or forming a limited partnership.

As the price of fossil fuels has increased, the popularity of renewable energy sources has soared. Wind and solar energy are becoming major players in the energy game, presenting investors with the opportunity to not only take advantage of an emerging industry, but also to invest in “green” energy sources. Those SDIRA holders who are concerned about making socially responsible investments can utilize these environmentally-friendly energy sources for their retirement portfolio.

Increases in the demand for energy are creating an emerging industry that could create an investment opportunity for self-directed IRA holders. As the account holder, it is important for you to perform thorough due diligence when choosing a new investment. Doing so will help you protect your retirement and allow you to find the right investment for you.

Retirement Plan Integration with Self Directed IRAs

Whether you’re getting close to retirement age or you’re just beginning to look into retirement planning, it is important to understand how each type of retirement account fits into your overall retirement plan. Common retirement accounts, such as the Traditional IRA, Roth IRA, and HSA, each play their own role in a well-rounded retirement strategy. Knowing how to utilize each type of account will allow you to develop the best retirement plan for your personal retirement goals.

Each plan type offers a different tax advantage. Traditional IRAs are traditionally thought of as providing tax advantages when funds are placed in the account, and Roth IRAs delay the advantages until funds are removed from the account. While this is generally true, there are many factors that can affect the personal advantages of any particular account. These factors can include the age at which you plan to retire, your current tax bracket, the tax bracket you will be in post-retirement, the cost of living where you plan to retire, and the performance of other investments outside of your retirement accounts. A study of each account’s tax advantages and how those advantages will interact with the factors above may help you to create a personalized retirement plan.

For self directed IRA account holders, determining which accounts will best suit your retirement goals can seem complex. Just because you have a self-directed account does not mean you are alone on your retirement journey. SDIRA account holders can utilize the services of Certified Public Accountants (CPAs), Certified Financial Planners (CFPs), RIAs, trusted friends, and others to form a financial team. This team can help you discover the right combination of retirement accounts for your goals while you maintain the independence that comes with self-direction.

One account to consider for your well-rounded retirement plan is a Health Savings Account. An HSA can help you plan for those medical bills that may be incurred after you retire, allowing you to use your IRA funds to pay for other things. Not only can your HSA help you save for future medical costs, but you may also invest your funds to help grow your account’s value. The HSA also provides another advantage. After the account is opened, any medical costs incurred and paid out-of-pocket may be reimbursed from the HSA at any time in the future. Your financial team can help you determine how best to utilize a HSA as part of your plan.

New Direction IRA is proud to be a part of your personalized retirement plan. The self directed IRAs and HSAs we provide allow you to diversify your retirement investments, use your personal expertise to invest in what you know, and adjust to changing market conditions. We offer education to account holders and non-account holders alike, as well as providing continuing education to CPAs, CFPs, and other members of your financial team so you can make the best decisions possible for your self-directed retirement plan.

IRS Explains Unrelated Business Income Tax (UBIT) and Unrelated Debt Financed Income (UDFI)

At New Direction IRA, a self-directed IRA and HSA provider, we hear a lot of questions about UBIT, or Unrelated Business Income Tax.

Many investors are afraid of acting on money-making opportunities because they think UBIT is a penalty or an excessive tax. However, UBIT typically means that—in the case of retirement accounts—the account is making money. It is not a penalty, just a way to even the playing field between tax-exempt and tax-deferred entities like a retirement account and other entities/people.

To get a basic understanding of UBIT and Unrelated Business Taxable Income (UBTI) and Unrelated Debt-Financed Income (UDFI), that two types of income that may be assessed UBIT, let’s go straight to the source: the IRS. The IRS Publication 598 outlines what these tax consequences are and how you’ll incur them.

Below are some excerpts from the IRS that may help an IRA holder to understand the parameters.

Unrelated business income - Unrelated business income is the income from a trade or business regularly conducted by an exempt organization and not substantially related to the performance by the organization of its exempt purpose or function, except that the organization uses the profits derived from this activity.

Income - Generally, unrelated business income is taxable, but there are exclusions and special rules that must be considered when figuring the income.

Exclusions  - The following types of income (and deductions directly connected with the income) are generally excluded when figuring unrelated business taxable income.

• Dividends, interest, annuities and other investment income - All dividends, interest, annuities, payments with respect to securities loans, income from notional principal contracts, and other income from an exempt organization's ordinary and routine investments that the IRS determines are substantially similar to these types of income are excluded in computing unrelated business taxable income.
• Royalties - Royalties, including overriding royalties, are excluded in computing unrelated business taxable income.
• Rents - Rents from real property, including elevators and escalators, are excluded in computing unrelated business taxable income.
• Exception for rents based on net profit - The exclusion for rents does not apply if the amount of the rent depends on the income or profits derived by any person from the leased property, other than an amount based on a fixed percentage of the gross receipts or sales.

Gains and losses from disposition of property - Also excluded from unrelated business taxable income are gains or losses from the sale, exchange, or other disposition of property.

Unrelated Debt-Finance Income

Income From Debt-Financed Property

Investment income that would otherwise be excluded from an exempt organization's unrelated business taxable income (see Exclusions under Income earlier) must be included to the extent it is derived from debt-financed property. The amount of income included is proportionate to the debt on the property.

Debt-Financed Property

In general, the term “debt-financed property” means any property held to produce income (including gain from its disposition) for which there is an acquisition indebtedness at any time during the tax year (or during the 12-month period before the date of the property's disposal, if it was disposed of during the tax year). It includes rental real estate, tangible personal property, and corporate stock.

If you have any questions about UBIT, UBTI or UDFI, feel free to contact us at NDIRA by visiting www.ndira.com and giving us a call, email or chatting online with an IRA expert.

(Information provided by the IRS publication 598.)

IRA Valutions: Who Cares What It's Worth?

Not all IRAs are created equal (when it comes to providing an annual valuation, at least).

Consider the case of “Berks vs Commissioner of Internal Revenue.” In the case, Bernard and Claire Berks invested in notes with their IRAs but the borrowers either defaulted or their collateral did not adequately secure the debt. This resulted in the notes being worth zero. The IRA provider, over a period of several years, requested that the Berks provide an annual valuation. The Berks referred these queries to the investment provider who, allegedly, called the provider and told them that “the notes are worth zero.” No documentation supporting this assertion was provided. The Berks requested that the assets be valued at zero and that the provider terminate their accounts. In accordance with the provider’s policy, the assets were distributed from the IRA holder’s account to the IRA holder at the last recorded book value of the asset. In other words, the IRA holder received a 1099-R (form for reporting distributions from pension plans) for the full amount of the account using the original face value of the notes.

The Berks took the case to tax court challenging the valuation of the IRA at the time of distribution. The IRS did not see this situation the same way as the Berks did.  Not only would the IRS not accept the opinion of the Berks that the IRA was worth zero, they penalized them 20 percent of the account value for their “negligence” in failing to make a reasonable attempt to comply with tax laws, maintain adequate books and records or to substantiate items properly. They were also cited with the intentional “disregard” for rules and regulations. 

As is usual in tax cases, the burden of proof falls on the taxpayer. The Berks’ tax return claimed the IRA distributions were not taxable and therefore paid no taxes on the reported distribution. They blamed the preparer for this “oversight.” They blamed the IRA Provider for distributing the account at full value. In short, they took no responsibility for their account or their tax preparation and the court was not sympathetic.  In fact, the court found that these arguments actually proved the Berks’ negligence.

The case brings up a greater issue about the importance of valuations.

IRA holders whose accounts have alternative assets in them receive a request from their IRA providers every year to provide fair market value for their IRA’s assets. For most IRA holders, these annual valuations are of little importance because their IRAs are invested in publicly traded securities and their IRA providers will often prepare valuations for their clients at a fee. For reference, about 97 percent of IRAs are invested in publicly traded securities.

For the $126 billion invested in self-directed IRAs (SDIRA) however, valuations matter a great deal. The account holder, not the provider, is responsible for providing valuations every year on their assets.

This issue of determining fair market values for hard-to-value assets in SDIRAs has become a focal point for the IRS. The IRS is now paying attention to the fact that with many SDIRA assets, there is a wealth of taxes to either be reaped or avoided. 

So the Berks case offers several learning points. First, provide an annual valuation, with documentation, when the IRA provider requests it.  If the asset is worth zero, provide proof that the asset is worth zero. For those with publically traded IRA investments, much of the work is done for them by the IRA investment provider, usually at a fee (we don’t charge a valuation fee at New Direction IRA.)  SDIRAs give IRA holders entrance to every investment allowed by law, but the account holder must find and manage the investment and provide the value annually.  Those are the rules. With SDIRAs, investors receive unlimited possibilities but they are also expected to know and understand the rules.   

What's Better: An HSA or a PPO?

With the Affordable Health Care Act (Obamacare) taking effect, health insurance has risen to the national spotlight in the last few months. Americans have more choices than ever on how to be covered for medical expenses, so I thought it might be good to highlight the differences between two very different, but very popular insurance types: High Deductible Health Plans (HDHPs) with Health Savings Accounts (HSAs) and PPOs (preferred provider organization).

First, the PPO. Like other insurance plans, it enables the account holder to choose his doctors and hospitals based on who will accept the insurance. PPOs will often have networks of doctors, specialists and doctors that the plan holder can work within or out of. If the plan holder visits out of network doctors or facilities, he’ll often have to pay a higher cost.

PPOs require premiums to be paid. Premiums are the cost of the plan and are typically (but not always) split between the employer and the employee in company situations. PPOs also have varying deductibles (the amount the plan holder pays in a given year) and lower deductibles typically indicate higher premiums. Deductibles range anywhere from $200 to $5,000 for PPOs.

The HSA operates differently. The HSA itself is not an insurance plan, therefore HSAs are couple with High Deductible Health Plans (HDHPs). The HSA is the pool of funds, then, that pays off medical expenses incurred in the HDHP.

HDHPs have little to no premium if offered by your employer and often the employer will contribute money to the HSA on top of that. Medical expenses incurred by the plan holder until the deductible is reach is paid by the account holder—typically via HSA funds. So if the HDHP’s deductible is $5,000 and the plan holder gets a blood test for $230, the plan holder would pay the full price. In the case of a bad medical year, the HDHP prevents against colossal medical costs by covering just about everything above the deductible limit.

What makes HSAs unique is how you can use the funds. First, any medical expenses incurred don’t need to be paid right away. You can actually pay those expenses out of pocket, keep money in your HSA and then reimburse yourself anytime in the future (as long as the expense is a “qualified medical expense” and you have the receipt.) Plus, when you use HSA funds for qualified medical expenses, you are achieving a discount on those expenses because it is not taxed.

And while those funds stay in the HSA, you can invest them in everything from stocks and bonds to real estate and precious metals. The flexibility of this account and the potential for massive growth attracts many people. It’s a great way to save on medical expenses and grow funds that can help in your retirement! If you still have funds in your HSA by the time you reach retirement age, you can distribute them like a normal Traditional IRA and use them for whatever you’d like.

For more information on HSAs or how they compare to other health insurance plans, visit www.NewDirectionIRA.com.

How Do I Find Self-Directed IRA Investments?

Self-directed IRAs, or SDIRAs, are becoming increasingly popular because they allow account holders to choose from a world of investments. At New Direction IRA we’ve seen IRAs invest in everything from trailer parks to oil fields to Middle Eastern currency and more.

The sheer number of investments could seem daunting, but many investors view this as an opportunity to invest in what they know and trust. Here, we’ll go through the main alternative asset types and share how you might begin looking for investments.

Note that all due diligence is your responsibility and not the responsibility of the IRA provider, like New Direction IRA. (At NDIRA, we do not offer financial advice; we only service the investment that you choose.)

Real Estate

Real Estate investments come in all shapes and sizes. You can invest your IRA in commercial or residential real estate, fix and flips, rental properties, raw land and everything in between.

There are many options for real estate IRA investing

You may find it beneficial to search for investment property by contacting a realtor, driving around the area you in which you want to invest or attending real estate investment groups. What’s important to remember is that you can invest in nearly any real estate as long as it follows disqualified persons rules.

Disqualified persons to an IRA include the IRA holder, his spouse, his parents and grandparents, his children and grandchildren, their spouses, certain fiduciaries and any entity owned or operated by a disqualified person. So, for instance, you couldn’t buy a rental property or vacation property and let your kids live in it.

You can, however, partner with both disqualified and non-disqualified persons. You’ll have to be diligent about paperwork and incoming/outgoing funds but the flexibility afforded by the IRS to maximize your funds opens your investment options even further. You can even take out a non-recourse loan to mortgage investment property. For more information on funding, visit http://www.newdirectionira.com/real_estate_ira.html

Precious Metals

Your IRA can invest in gold, silver, platinum and palladium products. There are certain fineness requirements for each and you cannot invest in many collectible coins, but there are simply many options for a precious metals investment. For a full list of acceptable coins and metals, visit http://www.newdirectionira.com/gold_iras.html.

In an SDIRA, you find the dealer from which you want to buy metals and determine the terms of the deal with him. You send the terms over to your IRA provider and they will send money where needed. At New Direction IRA, you can then choose your depository (where your metals will be stored) and the dealer will ship the metals directly to the depository.

Performing due diligence is necessary for all investments, especially precious metals. Make sure you are comfortable with the dealer and depository and the terms of the sale.

Private Equity

Finding private equity investments often requires more leg work than real estate or precious metals investments.

Where you can often find listings of property or scores of dealers offering metals, private equity offerings require greater diligence. There are several website cropping off that seek to match investors to companies and individuals seeking investments.

You can also invest your IRA in entities that may be launching a new product or certain groups that are preparing to make large investments. As above, disqualified persons apply and full details can be found at http://www.newdirectionira.com/private-equity.html.

The best way to find private equity investments is to get involved. Visit investment groups, research companies, search for startups and find an investment opportunity that fits your IRA investment goals.

How does Unrelated Business Income Tax (UBIT) work?

Securities brokers and some accountants will be the first to tell you that you don’t want leveraged property in either a Traditional or a Roth IRA because you will have to pay additional taxes, specifically Unrelated Business Income Tax (UBIT).

How UBIT Works

UBIT was instituted as a way to level the playing field between non-profit and for-profit companies doing similar work.

For example: A Homeowners’ Association “Dairy Glen”, a non-profit corporation, has installed a pool and tennis courts for its residents. These facilities are supported by the HOA dues, paid by the residents of that neighborhood. At some point the HOA board decides that they are going to open the recreation facilities to the public and charge admission or offer memberships, all funds going back to the HOA accounts.

Down the road is “Muscle World, Inc.” a gym that offers similar facilities to their members. Muscle World pays taxes like any other corporation but has a tough time competing with Dairy Glen because they have to pay taxes. This is where UBIT enters. The government, in order to force fair competition levies UBIT on Dairy Glen because they are now in a business that is unrelated to the original business of maintaining neighborhood facilities.

So how does UBIT relate to IRAs?

The government will give you tax-deferred status on the income generated by whatever you have in the IRA. However, it is not willing to shelter the profits of the income generated by funds brought into the account in the form of a loan.

The IRA is treated like a non-profit but the additional funds brought in are not. This is because the IRS doesn’t allow unlimited ability to contribute to a tax-advantaged plan. The amount of money you can shelter within an IRA is limited by the annual contribution limits, so by taking out a mortgage, you are increasing the size of your IRA.

For example, if your IRA buys a home using a mortgage, UBIT will be assessed on the leveraged portion, not the portion that your IRA contributed. Thus as your IRA pays off the mortgage, the percentage that incurs UBIT will decrease.

UBIT is assessed at corporate tax rates.

Quick UBIT Facts

-          LLCs will not protect you from UBIT, it still applies

-          The IRA pays the tax, not you.

-          The IRA has its own tax return and this return does not affect your personal tax return

-          For most leveraged real estate deals, an IRA does not pay UBIT until somewhere between years 4 to 8 because of depreciation.

UBIT is generated by an IRA in three ways:

1.       The net income generated by the leveraged portion of an investment at trust rate.

2.       Proceeds of a sale taxed based on balance of debt at time of sale at capital gains rate (short term gains are taxed at the trust rate.)

3.       The IRA owns an operating business such as providing goods or services. Tax is on 100% of the net income using the trust rate. (This situation is not covered in this article.)

UBIT Illustrated

A good exercise is to take the same size IRA and calculate the gain on a property with zero leverage. Compare this property bought with varying degrees of leverage. Estimate the income generated by renting the property, and see what UBIT may be over the next 4 to 8 years.

Before someone talks you out of leveraging a property within an IRA, do the numbers and decide for yourself. It may or may not make sense to use a mortgage but at least you will understand the decisions you make when investing your IRA money.

Remember that a self-directed IRA is the only way you can purchase real estate AND have a mortgage on it. 

What is a Self-Directed IRA? What are Alternative Assets?

The term Alternative IRA, which has been in the news so much recently, is frequently misunderstood. It is often thought to be an IRS designation that signifies an account type that is different from a traditional IRA or a Roth IRA, which are designated IRS account types. It is also not unusual for people to be under the impression that self directed means that the IRA owns an LLC which holds the IRA assets. Neither of these is the case.

“Alternative” as well as “Self Directed” are descriptive terms, not legal distinctions, and are used largely as marketing tools. ( In fact, terms such as “Rollover IRA”, “Real Estate IRA”, and “Gold IRA” are also descriptive and used primarily for marketing.) The only consistent meaning that alternative IRA might have is that the assets held by the account include something other than stocks, bonds, mutual funds, etc. And the
meaning of self directed IRA is basically that the IRA holder will have some choice in terms of what assets the account will hold. That may be a choice between two or three publicly traded stocks or bonds or funds, or it may be the ability to choose real estate, gold, private lending, investment in private companies, and more. IRA providers are not bound by the IRS to offer any particular suite of assets. It is incumbent upon the IRA holder to choose a provider that services the desired asset types.

The IRS, which governs IRAs, allows two basic tax arrangements for retirement accounts:

1) With a Traditional IRA, the IRA holder contributes money to the account “pre-tax”. While that money is in the account, it performs tax-deferred, meaning that the increase or decrease in its value does not have an effect on the IRA holder’s personal annual taxes. The only time that the IRA holder’s personal taxes are affected are when they make a contribution or take a distribution. A contribution will decrease the amount of earned income that the account holder declares for a tax year. And when a distribution is taken, the amount of the distribution is then added to the person’s annual income for that tax year and taxed accordingly.

2) In a Roth IRA, contributions by the IRA holder are “post-tax”; the investments in the account perform without tax consequence; and then can be distributed tax free to the IRA holder after the age of 59.5. These two basic arrangements, along with the associated rules for contributions and distributions, are the same for all IRAs, alternative or not, self-directed or not. For example, if a person opens a traditional IRA that is self-directed with a provider like New Direction IRA, which handles a wide array of alternative asset types, that account holder could have that IRA invested in a couple of rental houses and some gold bars. The rental income and appreciation of the real estate and the appreciation of the gold would constitute the performance of the assets. Regardless of what the assets were, the IRA holder could continue to make contributions per IRS regulations.

With any IRA, there are two dynamics occurring that affect the account’s balance. The first is the pattern of contributions and distributions. These are governed by IRS rules and the IRA holder’s strategy. The second is the performance of the money/assets that are in the IRA. This is governed by the economic factors associated with each particular asset. In other words, was it a profitable investment or not. The two dynamics are only related in that they are functions of the same account and are guided by the IRA holder. These dynamics are not affected by whether an IRA is self directed or not and whether the assets are publicly traded securities or alternative.

In the case of IRA terminology, it may be that marketing attempts to make the consumers’ options more understandable have back-fired and actually created less understanding. It can be helpful to remember 3 categories of terms:

1) IRS designations are account types (Traditional, Roth, or an employer plan). These account types have rules associated with them about taxation and contributions/distributions.

2) Asset terms are simply that, the type of asset in which the IRA is invested: real estate, gold, loans, stock (public or private), etc.

3) Descriptive terms are used to help lead the consumer to the service that they desire (i.e. an IRA that has gold or real estate or an IRA that results from a 401(k) rollover) and do not affect tax status.

All of the current conversation regarding “Alternative” and “Self Directed” IRAs, may seem confusing unless one is familiar with the terminology. Whether it is the success of Mitt Romney’s IRA or the Jean Chatzky report on the Today Show that is fueling interest in retirement investing, what is certain is that IRA account holders are becoming more and more aware of the choices that they have when it comes to their retirement funds.

The 5-year rule for Roth IRA withdrawals

If you’re one of many investors contributing to a Roth IRA or considering a Roth Conversion for an existing pre-tax retirement account, it’s important to understand exactly how the “Five Year Rule” works. Below is a short explanation of how the rule affects your IRA distributions.

What is the Five Year Roth Rule?

The five year Roth rule refers to a five year period that restricts tax-free distributions on the earnings/gains in a Roth IRA and distributions of converted funds in a Roth IRA. If a Roth IRA achieves gains in addition the contribution amount(s), distributions of those gains before the five year waiting period will be taxable. Similarly, funds that are converted from a “pre-tax” retirement plan to a Roth IRA must wait five years in order to be distributed tax-free. The five year period begins when an IRA holder opens a Roth IRA and begins making contributions OR when a new Roth Conversion is performed. In either event, the actual effective date of the five year Roth rule is always backdated to January 1 of the tax year the event takes place. This can be important because if you time things right, your wait time can actually be reduced by more than 20%. Let’s take a look at some math below to get a clearer understanding.

How is the Five Year Roth Rule Calculated?

New Roth IRA Example: If I start a Roth IRA in April, 2012 (remember to backdate) and begin making annual contributions beginning in the tax year of 2011, my five year time clock will have ended on January 1, 2016. Notice that my effective wait time was less than four years, not five. My wait period begins January 1, 2011, not April, 2012.

Traditional to Roth Conversion Example: If I have an existing Traditional IRA , it’s possible for me to perform a Roth conversion. To perform this process, I pay tax on the amount being converted in order to change my retirement funds from “pre-tax” to “post-tax”. I claim the converted amount on my tax return for the tax year in which I perform the conversion. Once I start this process, the five year rule begins. Just like before, the later in the year I perform my conversion, the more my five year rule becomes a four year wait.
It’s important to note that I must perform my conversion before December 31st or the tax year will effective change. For example, if I’d like my conversion to represent the tax year of 2012, I must complete my 2012 conversion before December 31st, 2012. Conversions made between January 1 – April 15th cannot be backdated to represent conversions in the prior year even though filing deadlines take place in April.

How does the Five Year Roth Rule affect my distributions?

As I mentioned above, the five year rule dictates that distributions, over and above the amount contributed and/or the amount converted, that are taken prior to the five year wait period after the establishment/conversion of the account are not tax-free. See the examples below for a comparison of scenarios.

John, at 57 years of age, makes a maximum contribution of $6000 to his Roth IRA on April 15, 2007 for the tax year of 2006. On January 1st, 2011, John decided to withdraw $8000 from his Roth IRA. Of the $8,000 that John withdraws, $6,000 is principle contribution and $2,000 is profitable earnings. 
Results: Since John is now over the age of 59.5 and his five year rule has expired (Jan 1, 2006 – Jan 1, 2011), the entire distribution is qualified for a tax-free distribution and isn’t included as taxable-income. In the example above, John made a profit of $2,000 over a period of almost four years but because his first contribution in the Roth IRA was dated back to January 1, 2006, his wait for tax-free distributions was considerably shorter than 5 years.

**Note that he was over the required age of 59.5 for tax-free distributions as well.

Now let’s look at the same example if John takes his distribution after only 3 years of participating in a Roth IRA:

John, at 57 years of age, makes a maximum contribution of $6000 to his Roth IRA on April 15, 2007 for the tax year of 2006. On January 1st, 2009, John decided to withdraw $8000 from his Roth IRA. Of the $8,000 that John withdraws, $6,000 is principle contribution and $2,000 is earnings. Even though John is now over the age of 59.5, his distribution on the earnings is being taken out of the account before the five year rule expires. $2,000 of his distribution must be claimed as taxable income on his tax return.
Results: After age 59 1/2 and once the five-tax-year holding period is met, any distribution from the Roth IRA will be considered a qualified distribution and be tax-free. Remember that each conversion from a pre-tax IRA will start its own individual five year waiting period. You may consider keeping any conversions and/or contribution accounts separated in different Roth IRAs for organization purposes.

Partnering with disqualified persons to your IRA

There is a lot of discussion about “Disqualified Persons” when one is creating a strategy for acquiring IRA assets. The IRS’s disallowance of self-dealing with regard to retirement accounts means that if an investor is considering transactions such as purchasing real estate, investing in a company, making a loan, or even buying hard assets like precious metals, they need to identify persons who are disqualified to their IRA in order to avoid a prohibited transaction and its concomitant penalties.

It may sound like a simple matter to list those people and entities that are disqualified, but the fact that there are several pages of the Internal Revenue Code (section 4975) dedicated to this issue indicates just how gray this area can get. To make this matter even a little more difficult to keep straight, partnering with these “disqualified” persons is allowed. While an exhaustive examination of this issue may not be desirable (or even possible), it is helpful to review a few of the basics.

Disqualified persons include one’s self, one’s spouse, lineal ascendants and descendants and those descendants’ spouses. The designation also extends to business entities owned and/or controlled by these people as well as some fiduciaries associated with these business entities.

Transactions in which an IRA is not allowed to participate with a disqualified person/entity include buying from, selling to, paying compensation to, extending credit to, receiving a loan from, and allowing use of assets.

Partnering with disqualified persons/entities is allowed. The way that works is that an IRA acquires a specified percentage of the asset as does each of the other partners. All income and payments related to that asset must be divided along the percentage lines established at the purchase of the asset. This can be somewhat cumbersome, depending on how much activity is associated with the investment, but it is imperative to keep up with this arrangement.

A helpful way to think about whether you are contemplating a transaction with a disqualified person/entity, which is prohibited, or a partnership, which is allowed, is to think of a negotiating table on which a transaction will be made. On this table, money will move from one side of the table to the other, and, in return, a benefit or asset will move in the opposite direction. If the disqualified person/entity is on the same side of the table as your IRA, you are likely okay. If the disqualified person is on the other side of the table, you might be looking at a prohibited transaction.

In some cases, IRS parameters for IRAs can be confusing. The information above that describes some basic principles that apply to disqualified persons and what an IRA can do in relation to them is only part of the whole picture. Despite the fact that it can daunting, it is much better to invest the time to learn about the rules now, before making a move with your IRA, than to pay for a mistake with your hard earned retirement funds later. The good news is that you have a place to start the process in Entrust New Direction IRA. Their knowledgeable staff, informative website, and frequent educational programs are excellent sources of information about all aspects of IRAs.